Business is Changing
Conventional management practices have tremendous amounts of inertia driven by software, consulting, accounting and academic experts. Many of these practices trace their origins back to the 1930s and 1950s. Yet the world looks nothing like it did at that time. The changing global and industrial landscape is forcing companies to behave differently. Consider this astonishing information from the Harvard Business Review:
“We investigated the longevity of more than 30,000 public firms in the United States over a 50-year span. The results are stark: Businesses are disappearing faster than ever before. Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago. Although we may perceive corporations as enduring institutions, they now die, on average, at a younger age than their employees. And the rise in mortality applies regardless of size, age, or sector. Neither scale nor experience guards against an early demise. We believe that companies are dying younger because they are failing to adapt to the growing complexity of their environment. Many misread the environment, select the wrong approach to strategy, or fail to support a viable approach with the right behaviors and capabilities.” (Martin Reeves, Simon Levin, and Daichi Ueda, Harvard Business Review, January-February 2016)
“It is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself.” Leon Megginson
Companies must adapt and change or their very existence is threatened. But what to change to? How to change and drive adaptation? Is there a safe and effective path to transform a company from an operating strategy developed in the 1950’s measured by financial accounting principles developed in the 1970’s and 80’s to an agile demand driven enterprise capable of staying ahead of today’s hypercompetitive market?
Flow – Common Sense but Not Common Practice
The broad based appeal of “flow” seems to be obvious. George Plossl, a founding father of MRP, in the second edition of Orlicky’s Material Requirements Planning (McGraw-Hill, 1994) said that
“all benefits are directly proportionate to the speed of flow of information and materials.”
Improvement gurus such as Taiichi Ohno, Eli Goldratt and W. Edwards Deming founded entire improvement disciplines on the concept of flow. Early industrial pioneers such as Henry Ford and Frederick Taylor built large manufacturing empires based on this concept. F. Donaldson Brown defined the basics of management accounting on the concept of flow. Flow is obviously common sense.
Plossl’s first law can be illustrated by a very simple equation featured in the book Demand Driven Performance – Using Smart Metrics (Smith and Smith, McGraw-Hill, 2013). The equation shows that changes to flow directly yield changes to cash velocity which in turn influences ROI. This equation is easy to grasp for people at any level of the organization and links the velocity at which we move information and materials directly to ROI. Yet, if flow is so important and intuitive why does its effective enterprise-wide implementation prove to be so elusive to many organizations?
There is an important caveat to this equation. Organizations cannot just quickly push large amounts of data and materials and expect to automatically reap huge benefits. In fact, the only way that data can become valuable information and those materials can be converted to cash is to ensure that both are “relevant”. Thus Plossl’s law must be amended to
“all benefits are directly proportionate to the speed of flow of RELEVANT information and materials.”
With the inclusion of the word relevant, an expansion to the above equation is necessary. This expansion was also featured by Smith and Smith in Demand Driven Performance – Using Smart Metrics. This new component of the equation brings to light why an organizational strategy based on flow proves to be so elusive. It explains the frustrations with Lean, Six Sigma and Theory of Constraints (TOC) implementations and why they so often end up being simply lip service or merely a “program of the year” in larger organizations.
What directly impedes better flow across organizations is variability. The more variable an environment; the worse the flow. In our more complex and volatile world, variability seems to increasing at a faster rate than we can compensate for it. So, must we give up the quest for flow? Is it simply a pipe dream to never be achieved like the pursuit of perfection?
No! The key to managing variability is to create visibility to relevant information. When information is irrelevant, the picture is distorted, variability is exacerbated, flow breaks down and ROI is adversely impacted. Thus, the starting point for any company to operating in a flow-based fashion is comprehending and gaining visibility to relevant information.
The next blog will describe the necessary prerequisites for relevant visibility. Thank you for following this blog series, we look forward to your comments and feedback. Please find Carol Ptak at www.demanddriveninstitute.com